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Will food inflation spoil India's credit rating?
Wed, 20 Mar Pre-Open

Food is one of the basic needs of the mankind. Hence, when food prices go up, it is a reason to worry. Especially in India where food accounts for around 50% share in household spending. Since private consumption is so critical to the Indian economy, the rising food prices pose a direct threat to sovereign ratings. As food prices continue to surge, Moody's, the only major credit agency to have a 'stable' outlook on our economy, has expressed concerns that hints at a warning before a rating downgrade.

These are precarious times for our economy. Pick up a metric. Be it fiscal deficit, current deficit, growth rate, currency stability or inflation, we have a lot to bring back to order. In these times, if food inflation continues to remain firm, it will filter through the macro economy and will leave very little room for RBI to cut rates thus dampening growth prospects. Higher food prices will further weigh heavy on food subsidies thus leaving us with messier fiscal and current account balances.

With such adverse implications, the food inflation is a crisis that needs urgent attention and solution. It would be unfair to shift the blame to vagaries of monsoon. It is not that we don't produce enough. However, before the food is consumed, it goes through a process of mediation which is highly inefficient and time consuming. It leads to wastage of food and ultimately food inflation because of cascading impact of higher profit margin at each stage.

Hence, we need to invest more in streamlining the process of food delivery from farm gate to the final stage of consumption. For this, we need to invest in food distribution, storage systems and agricultural productivity. Also, the unscrupulous conversion of farm land for residential and commercial purposes needs to be checked. Food inflation is likely to go up as diesel prices are hiked and population grows further. Hence, the Government needs to act soon. Else we may have to pay a heavy price in the form of a sovereign rating downgrade.

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